The SEC signals a shift in regulatory approach to emerging cryptocurrency class with recent guidance on memecoins, suggesting a broader policy change that extends beyond this new classification.
Recent SEC Guidance on Memecoins Suggests Broader Policy Change
The recent guidance issued by the staff of the SEC’s Division of Corporate Finance has significant implications for the digital-asset industry, extending far beyond memecoins.
The Securities and Exchange Commission (SEC) is a US government agency responsible for regulating and overseeing the nation's securities industry.
Established in 1934, the SEC aims to protect investors by maintaining fair, efficient, and transparent financial markets.
The commission has five main divisions: Corporation Finance, Investment Management, Trading and Markets, Enforcement, and Division of Economic and Risk Analysis.
Memecoins: A New Classification
On February 27, the SEC described memecoins as digital assets ‘inspired by internet memes, characters, current events, or trends for which the promoter seeks to attract an enthusiastic online community.‘ The guidance explains that these assets are generally not sold as securities. This classification is consistent with the SEC’s shift away from efforts under former Chair Gary Gensler to claim regulatory power over virtually the entire digital-asset industry.
The Howey Test: A Changing Landscape
The SEC’s attempts to regulate digital assets during the Biden Administration largely hinged on the Supreme Court‘s so-called ‘Howey test‘ for determining whether a transaction involves an ‘investment contract.’ The test requires an investment of money in a common enterprise, with an expectation of profits from the efforts of others. In recent enforcement actions against digital-asset exchanges, defendants argued that secondary-market resales of digital assets lack the necessary ‘investment of money in a common enterprise’ because investors’ funds are not ‘pooled‘ by developers into a common fund and then used to further a business in which the investors share the profits.
The Securities and Exchange Commission (SEC) is a US government agency responsible for regulating securities, stock exchanges, and other financial markets.
Established in 1934, the SEC's primary goal is to protect investors by ensuring fair and transparent market practices.
Key regulations include disclosure requirements, insider trading prohibitions, and corporate governance standards.
The SEC also oversees publicly traded companies' financial reporting and enforces compliance with federal securities laws.
A Reversal in Policy
The SEC’s new guidance confirms that this argument is correct. It states that purchasers of memecoins make no investment in a common enterprise because their funds ‘are not pooled together to be deployed by promoters or other third parties for developing the coin or a related enterprise.‘ The guidance also explains that memecoin purchasers do not expect profits derived from the efforts of others, another Howey requirement. Rather, the value of memecoins comes from ‘speculative trading and the collective sentiment of the market, like a collectible.’
Broader Implications
The SEC’s memecoin guidance is most obviously consequential for the sale and promotion of memecoins. However, it has broader implications for all secondary-market transactions in digital assets, including on exchanges. In secondary-market transactions on exchanges, purchasers’ funds likewise ‘are not pooled together to be deployed by promoters or other third parties for developing the coin or a related enterprise.‘ Thus, the SEC now seems to recognize that under a proper application of the Howey test, those transactions are beyond the agency’s reach.
A Shift in Regulatory Approach
This doctrinal reversal may be part of the impetus behind the SEC’s recent decisions to voluntarily dismiss several cases involving secondary-market transactions and to stay further proceedings in others. The SEC’s new guidance is consistent with the agency’s other recent steps to pull back from the regulation-by-enforcement approach that plagued the industry under former Chair Gary Gensler.
The Securities and Exchange Commission (SEC) has implemented several policy changes in recent years to enhance investor protection, improve disclosure requirements, and increase regulatory efficiency.
The SEC's Division of Corporation Finance has clarified rules on shareholder proposals, while the agency has also introduced new guidance on cybersecurity disclosures.
Additionally, the SEC has expanded its whistleblower program to incentivize tipsters and protect their identities.
These policy changes aim to promote transparency and accountability in corporate governance.
A Significant Step Forward
The SEC’s guidance on memecoins offers welcome clarity from the agency in an area where the agency’s prior approach had significantly muddied the waters. It is, in short, a significant step in the right direction for crypto law and policy in the United States.
